With President Donald Trump and Republicans controlling the House and Senate, we are likely to see a number of tax changes in the year ahead if his campaign plans and promises hold. As with everything else, the Trump administration was light on the details but here is what we do know about the proposed Trump tax plan:
- Federal tax rates and brackets would be simplified down to three versus the seven today. Those with a taxable income between $0 and $37,500 ($0 to $75,000 for married filers) would be subject to a 12% tax rate, taxable income between $37,500-$112,500 (or $75,000-$225,000 for married filers) would be subject to a 25% rate. While those with taxable income above $112,500 ($225,000+ for married filers) would be subject to a 33% federal tax rate.
- The standard deduction would more than double to $15,000 for single filers to $30,000 for married couples filing jointly while ending personal exemptions. This increase along with the lower tax brackets would see federal taxes due go down for most Americans.
- Itemized deductions would be capped at $100,000 for single filers and $200,000 for married couples filing jointly. This is down from current levels and in line with Trump’s goal to simplify tax rules and prevent the rich from taking legally gray deductions.
- To promote small business investment Trump would eliminate the 3.8 percent tax on net investment income on people with incomes (MAGI) of over $200,000 for single filers and $250,000 for married filers. The tax rates on long-term capital gains would be kept at the current 0%, 15% and 20%. In a hit to hedge fund managers, there is also a proposal to taxing income from carried interest at ordinary income tax rates.
- A full repeal the alternative minimum tax (AMT) and the estate tax. Under current law, estates valued at more than $5.45 million are subject to a 40% tax rate. Cutting the AMT and estate tax would stand to benefit higher income earners the most.
- The individual mandate (or Obamacare tax as some call it) would also be repealed in 2017, meaning that penalties would not result if people don’y have health insurance.
- The corporate/business tax rate will be lowered from 35% to 15% to become more competitive globally. To encourage the repatriation of earnings being kept by American multinationals in overseas banks, subject to lower local corporate tax rates in those countries, the Trump administration will only subject these funds to a lower 10% corporate repatriation tax rate.
[Update Mar 2017] Following a meeting with business leaders President Trump announced that a major release on details behind his tax reform package is on tap for the coming weeks. Details will be provided covering “comprehensive tax reform both the business side of the tax ledger as well as the individual rates,” according to follow up comments from press secretary Sean Spicer. No exact date was given for release of this information, but Trump indicated it would be “over the next two or three weeks [end of February]…and would be phenomenal in terms of tax….with significant tax reductions.” He went on to say that the tax reforms he is proposing (see below) will, “… lower the overall tax burden on American businesses big-league“. However, until the Obamacare repeal and replacement bill is resolved, it is unlikely we will see much more on tax reforms. My guess is that it will take till Summer before we see more details on the Trump tax reform plan.
While they may get passed by Congress, a lot of Trump’s tax changes won’t go into effect until 2018, since 2017 tax rates and brackets have already been established. Further, the House Republicans (under Paul Ryan) also have an alternative tax plan which while also looking to cut corporate and personal taxes, is not as aggressive as the proposed Trump tax plan.
So in order to get wide scale tax reform passed across all branches of government there will need to be some sort of compromise tax plan agreement. The Trump administration also hasn’t laid out any real plan to pay for these tax cuts and proposed no net spending reductions to offset his tax plan’s $7 trillion cost.
Under a Trump tax plan middle class tax payers would likely see modest tax savings, while those in highest income ranges would actually see the most in savings given the lowering of the highest marginal tax rate, increase in standard deduction and repeal of the AMT. Under proposed Clinton plans middle income earners saw more tax savings while higher income earners were taxed more heavily.